If your tax bill just doesn't seem right, sometimes it pays to check. Photo / File
COMMENT:
Q: I'm 45, married with three kids and on a very good income. My wife is a homemaker so I'm the primary breadwinner. We have a couple of rental properties in addition to our main house and a holiday house (around 65 per cent equity across those properties).
Also, I've been able to build up a KiwiSaver balance of about $500,000, which I'm over the moon with. I think I'm going to be in pretty good shape to retire some years in advance of 65.
Because of this, I'm considering suspending my KiwiSaver contributions and diverting those funds into a similar (growth) managed fund. That way, I won't have to wait until 65 to start drawing down on those savings. What are your thoughts on this approach? Are there any downsides?
Note that the company I work for will give me the same employer contributions either way.
A: That's great that you'll still get employer contributions to another fund. But you'll miss out on government contributions — of up to $521 a year if you put in $1042 or more.
To get around that, I suggest you move the contributions from your pay to a non-KiwiSaver growth fund, to keep access to that money. But also set up an automatic transfer from your bank account of $87 a month into KiwiSaver so you keep getting the government money. Your KiwiSaver account can fund your later retirement years.
You — and I suspect some other readers — might argue that you don't really need the government's contributions. But you could always give that money to charity when you get to 65.
Watch out for fees on non-KiwiSaver funds, which are often higher than in KiwiSaver. And make sure the fund is a PIE, which most of them are. That way you'll continue to pay slightly lower taxes.
Another thought is that you could use your future savings to get rid of your mortgages.
Are they on the rental properties or your home or holiday house? If it's the last two, the conservative approach would be to pay down those mortgages as soon as you can. If you have fixed-rate mortgages, you might need to wait until the terms end, to avoid any early repayment penalties.
Paying off a 5 per cent mortgage improves your wealth as much as earning 5 per cent, after fees and taxes, on an investment. You might well do better than that in a growth fund, but it's a lot riskier.
The argument isn't as strong for rental property mortgages, as the interest on them is tax-deductible. That means a 5 per cent mortgage actually costs you 3.35 per cent after tax if you're in the 33 per cent tax bracket. So, paying it off is like earning 3.35 per cent after fees and tax — usually bettered in a growth fund over time.
For more on paying down a mortgage versus investing, read on.
By the way, you are indeed in good shape financially. If you retire early, I would love to see you doing some volunteer work to help out all of those who have read your letter and said, "If only ..."
Q: I've always followed the idea of paying off my mortgage as quickly as possible to reduce the total interest, but recently I have been wondering if this is the best idea.
With the record low interest rates, should I rather reduce my mortgage repayments to the minimum and instead funnel that additional money into my share portfolio (index fund)?
In this way, if my shares return 10 per cent over the next 10 years, and I'm only paying 4 per cent on my mortgage, aren't I 6 per cent better off?
I understand there is a risk as no one knows where interest rates will be in 10 years, or if the sharemarket will make those returns. But I can always cash up the shares if the balance shifts.
A: It all depends on how much risk you want to take on.
You're quite right that you'll be 6 per cent better off if your shares give you a 10 per cent return while your mortgage costs just 4 per cent. But that's a fairly big "if".
Both international shares and — even more so — New Zealand shares have had really good runs for the past 10 years, since the global financial crisis. That's a long time for the markets to have risen pretty steadily, with only the occasional fairly minor wobble.
Nobody knows what will happen next. But keep in mind that there have been 10-year periods in which investments in index funds have actually fallen a little. That's highly unusual, but it does happen.
What's less unusual is an up and down decade in which shares don't grow at their usual long-term average pace of about 6 or 7 per cent a year after fees and tax. You might not be so happy if your shares grow at an average of 2 per cent while your mortgage is 4 or 5 per cent.
You say you can always cash up the shares if the balance shifts. But that would mean getting out when they are low. Ouch! Also, it will be hard to know just when to cash up.
Let's say there's been a downturn. Do you bail out then, or hang about — perhaps only to see prices fall further?
I hate to be a wet blanket, but I'm worried that too many people are overconfident about both share and property investments, not realising how unusual the past 10 years have been.
Having said all that, if you could cope with my bleak picture — of your share investments falling over 10 years — then go ahead. There's a good chance it won't be that bad, and you might do really well.
Q: I work and earn a yearly income. My spouse is a hard-working at-home mum and we have five dependent children. We receive Working for Families and the in-work tax credit.
I have a KiwiSaver scheme and have been paying into it since it started. This year my KiwiSaver made a return of a few thousand dollars, which was then added to my yearly total income.
This meant my WFF and IWTC was reassessed. I had been overpaid due to these extra earnings and now have to pay some back.
I see this as unfair. I shouldn't be penalised for contributing to KiwiSaver and it performing well. I can't use my KiwiSaver until I am 65, so really this income is not usable and therefore shouldn't be taken into account when calculating WFF and the IWTC.
Is there some way this matter can or should be looked into?
A: Your letter surprised me. I agree that it doesn't seem right to include your KiwiSaver earnings in the calculations. So I forwarded your letter, without identification details, to Inland Revenue for comment.
Their reply: "Income from a locked-in PIE (such as KiwiSaver) will not affect Working for Families Tax Credits or student loan repayment obligations.
"If you are required to include the income from your KiwiSaver or other locked-in PIE on your tax return, and you are a Working for Families Tax Credits customer or student loan borrower, you should file an IR215 to ensure this income does not get included for these calculations.
"Income from a non-locked in PIE will affect your working for Families Tax Credits and student loan repayment obligations."
So it seems you've been treated wrongly.
The Inland Revenue spokeswoman added that if you were willing to give them your name and email address, they would contact you "to see if we can work out why this happened".
The upshot? A few days later, this came from you: "Thanks for making the enquiry to the IRD for me! The outcome was positive.
"The problem was my accountant had not put the PIE earnings from my KiwiSaver into the right category or ticked the wrong box or something like that. The lady that rang was helpful and sorted it out for me quickly."
I hope the accountant has apologised to you.
Q: My KiwiSaver question is to do with a fairly large and probably increasing section of our workforce employed in the so-called gig economy — a trendy term for people in job-by-job engagements, self- employed, who work without any security and pay their own tax (not through PAYE).
These people are disadvantaged when it comes to KiwiSaver. Given these workers won't be getting KiwiSaver employer contributions (sure, they can get the $521 government contribution like everyone else), don't you think it would be more equitable if there was tax deductibility for them (up to a set maximum) if they put more aside into KiwiSaver?
I realise this is probably a political question, but it does seem to be an unfair gap in the current system.
Full disclosure: I have been self-employed in this type of work for the past eight years, but as I turn 65 next year, it is probably a bit late for me to benefit from any change.
A: I agree that self-employed people get a bad deal in KiwiSaver — and it tends to mean they don't build up much savings in the scheme.
Your idea has merit, although it might be complex to administer — especially for people who are part-time employees and part-time self-employed.
And would you include people who earn money from being landlords — some of whom would argue that makes them self-employed?
KiwiSaver is relatively simple, which is great. But perhaps the policy makers can come up with some simple way to make it fairer for the self-employed.
Q: I have been struggling to find a KiwiSaver fund that not only avoids investment in petroleum, tobacco, etc, but also proactively invests in new and emerging clean technology focused on reducing carbon emissions — for example, renewable energy, innovative transport solutions, sustainable agriculture; something along the lines of the Green Investment Fund announced by James Shaw.
I have been entirely unsuccessful in finding anything. Could you possibly advise if there is a KiwiSaver scheme that ticks the box?
A: A new website, called mindfulmoney.nz, will help you with your search. It lets you do two things:
• Find out what's in your current KiwiSaver fund.
• Find a fund that fits your values.
With the second option, you're asked to pick an investment approach, out of: avoids your concerns; selects better companies; low fees or higher past returns.
I strongly suggest you don't choose higher past returns. Often funds that have done well in the past don't continue to do well, and in fact may be more likely to do badly in the future.
Beyond that, pick the approach you like best. In your case, that might be "selects better companies".
You can then specify the industries or activities that concern you most, and the ones that matter less to you. The choices are: alcohol; animal testing; fossil fuels; gambling; genetically modified organisms; human-rights and environmental violations; palm oil; pornography; tobacco and weapons.
Finally, you're asked three questions to decide what level of risk you want. The tool then suggests some suitable investments for you, out of 26 KiwiSaver funds that have met the website's ethical standards.
They include the three funds offered by a new "ethical" provider, CareSaver.
The other funds are offered by Amanah, AMP, Booster, Christian KiwiSaver, Kiwi Wealth, Mercer, QuayStreet, Simplicity and Superlife.
Mary Holm is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
OPINION: You need to consider interest, taxes and fees.